"We Have the Flexibility and Firepower to Succeed in Volatile Times."

A defense contractor looks to extend its diversification efforts even as it anticipates the re-arming of America. An interview with Bruce L. Tanner, EVP and CFO, Lockheed Martin Corp.Scott Leibs, CFO MagazineJuly 15, 2010

You might think that these would be boom times for defense contractors, given the duration of the war in Afghanistan and the continuing focus on security in the long wake of 9/11. But those forces are counterbalanced by the Department of Defense's efforts to rein in costs and shift spending to projects more aligned with the realities of current warfare.

Lockheed Martin Corp. has experienced this duality in spades. Last fall it announced that earnings had risen 8% year over year, yet its stock price fell almost 7% as investors wondered how it will fare amid shifting DoD priorities, not to mention the impact of the recession.

Executive vice president and CFO Bruce L. Tanner took those developments in stride. In his nearly three decades with the company, he has weathered plenty of ups and downs, and he says that more lie ahead. The company has seen some contracts curtailed and others pass it by completely, including a $2.1 billion satellite project that Iridium Communications recently awarded to a European consortium. But Lockheed continues to expand into new lines of business, and Tanner is committed to keeping the company focused on the big picture. He recently spoke about the many ways in which that challenge manifests itself.

You've spent your entire career at Lockheed. Presumably that gives you certain advantages as a CFO?It does. For one, it has allowed me to see several cycles both within the economy and within our industry, including some enormous consolidations that took place after the fall of the Berlin Wall. I've been part of a company that was sold, I've been part of a company that's acquired many businesses, and I've seen many reform initiatives. Another advantage is that this is a small industry, much smaller today, in terms of the number of players and the number of those employed, compared with when I started. Our customers are people who started off as lieutenants and captains and are now generals and admirals, and we know each other. This is a very long-cycled business of relationships.

Not only is your business built on long-term relationships, but it also depends on long-term contracts. Has that insulated you from some of the recession-oriented realities faced by, say, a consumer products company?The recession has manifested itself differently for us, and in some ways has had less of an impact. We did see some near-term impacts, such as the decision to terminate the Presidential helicopter program, to not extend F-22 production beyond the 187 under contract, and to cancel a couple of other programs, but those are hard to directly associate with the recession. It was just some belt-tightening within the DoD that Secretary [Robert] Gates decided to do. We still had 6% sales growth last year, and we're expecting about 4% this year.

Your status as a defense contractor may have insulated you from the recession, but it also creates its own vulnerability as the United States reevaluates its defense strategies. To what degree can a company like Lockheed diversify or become more nimble?All told, about 85% of our revenue comes from U.S. government sources, but only about 60% is from the DoD, which may surprise a lot of people. We've become pretty diverse, particularly with IT services. We've been the largest IT provider to the federal government for 16 straight years. We also expect to increase our global sales, which account for about 14% of revenue today, to 20% over the next two to three years. The other big [opportunity] is that we have a much stronger balance sheet. There was a time earlier in my career when we had $13 billion or $14 billion worth of debt. Now, we have just over $5 billion and we're a much larger company. All in all, I like our current balance-sheet position because it provides us with the flexibility and firepower to be opportunistic in a volatile environment.

One limiting factor, though, might be the nature of your workforce. It's highly specialized, so I imagine doing a sizable layoff whenever you need to cut payroll isn't as easy a lever for you to pull as it might be for a CFO in another kind of business.Half of our 136,000-person staff is composed of scientists and engineers. They represent an awful lot of intellectual property, and that is the seed corn that sustains the business going forward. There isn't much that we can't do with the technical workforce that we have, so we're constantly watching to make sure we have enough applications to utilize it. But one of our biggest challenges is that we are a fairly senior organization; over the next 10 years a large portion of our employee population will become eligible to retire. That's something that's affecting both the technical and nontechnical sides of the house, including finance.

To what degree do you try to get granular with that? Do you project how many people may be retiring in a given year?We probably get more granular each and every year, but it's hard to predict exactly when someone is going to retire. It's not just age-dependent, obviously. Like every other industry, we saw a slowdown in the number of people who retired when the market dropped significantly in 2008, and 2009 was a lower year for retirements than we expected. But that's not something we can count on going forward. I do talent planning on at least a quarterly basis, and we now devote [more] resources to knowledge transfer through internally produced monthly Webcasts and other programs that help retain the kind of tacit knowledge that is difficult to convey through conventional training.

Beyond those internal efforts, how else do you prime the talent pipeline?We devote a large share of our philanthropic budget to fund schools, events, and even educational movies that encourage more students to pursue an education in a technical discipline. As a country, we are not generating enough graduates with technical degrees to replace those who will soon retire.

You alluded earlier to some projects that have either been scaled back or cut altogether. Lockheed lives and dies by large contracts. How do you keep staff motivated when the news is less than good?One of the things that we keep saying is that the portfolio development that we've done over the last decade remains very relevant and very affordable. That's important in an environment where there's likely not going to be a whole lot of brand new programs. I think incumbency matters, and we are the incumbent on many products that we feel very good about. What I keep telling people is, let's just perform. The country needs to recapitalize its military assets. I think one of the bigger misconceptions is that all the spending we've done since 9/11 has given us a very capable and fairly new set of equipment for the military's use. In fact, just the opposite is true. We're actually burning up the useful life of the assets as we use them in theater, to the point where we do need to recapitalize those assets.

Your two immediate predecessors became the CEO and the president of a business unit. Do you see yourself in a nonfinance role some day?I don't know. I think I've got a great job right now that I very much love doing. I'll be on the [CFO] job three years in late August or early September, and it sure doesn't seem that long ago, so I think that's positive. If the leadership team or the board of directors asked me to do something different I'd probably listen, but I'm having a lot of fun doing this job right now.